In today’s economy, with the pandemic destroying businesses after businesses, it can be difficult to still gain any profits from your business work. Nearly all companies are streamlining their production so that they can get the most out of their investments, and those who choose to not streamline are cautious about their investments and try not to take risks.
However, taking a risk can sometimes pay off. For instance, leverage can allow you to multiply your gains as well as your losses through methods such as borrowing money, purchasing fixed assets, or making use of derivatives. For instance, if you have or work for a pubic corporation, you can leverage your equity by borrowing some money in order to offset your need for equity capital. This way, you share your profits, and even your losses. You can also buy fixed assets, which can leverage your revenue. This increases your proportion of fixed costs, so that when revenue changes, you have an even larger change in your operating income.
The advantage to this technique is that once you get a large amount of money in return for your investment, you can easily use it to increase your productivity. As your operating income increases, you can also get higher profits. Of course, you still need to face the risk of multiplying your losses. If you borrow too much money and the economy falls, you might have to battle bankruptcy. In extreme cases, corporations that relied too much on their leverage suffered in economic downturns, while corporations that did not carry out a lot of leveraging measures actually survived.
If you buy stocks and the stock declines to 20%, you will most likely lose 40% of what you have invested if you use that stock as leverage. There are still caveats, however. If you are borrowing money so that you will add to your product line or modernize it, or if you are using leverage to expand your company into the international market, then your earnings – your diversification, as it were – can offset your leverage risks.
There are exceptions to the rules, of course, but you must simply remember that like all investments, leveraging has its risks and benefits, and both these risks and benefits are extremely high. If you are able to weather the current world economy and get past the downturns, then you can expect high returns and good productivity. And if you have good productivity, you can offset the risk of your leverage. But if you are not able to get past the downturns, you can take your company down the bankruptcy road. Consider what and how to leverage, and you will see your profits increase.